Third Circuit Rebuffs Johnson & Johnson’s “Texas Two-Step” Maneuver

By Michael L. Moskowitz, Esq. & Melissa A. Guseynov, Esq.

In a recent decision of interest, the Court of Appeals for the Third Circuit reversed the decision of Bankruptcy Judge Michael B. Kaplan and held that Johnson & Johnson (“J&J”) improperly placed its financially sound subsidiary, LTL Management LLC (“LTL”), into bankruptcy. Called a “Texas Two-Step,” J&J attempted to consolidate and resolve more than 40,000 lawsuits alleging its baby powder products caused cancer by creating LTL and transferring the massive lawsuit liability to it prior to commencing bankruptcy. 

The Third Circuit rejected this type of restructuring strategy, explaining that LTL was created solely to file for Chapter 11 protection and was not in financial distress, as J&J had agreed to fund LTL’s lawsuit liability. The decision dismissed LTL’s bankruptcy case, which revives the lawsuits against J&J. 

Proponents of the decision lauded the Court for allowing the tort claimants their day in court and blocking J&J’s attempt to sidestep full prosecution of the lawsuits. Others, however, note that resolving such lawsuits as expeditiously as possible in bankruptcy via a funding agreement was in the best interests of claimants and all stakeholders, ensuring that litigation did not drag on for many years in civil proceedings.

J&J is expected to challenge the ruling. Falcon Rappaport & Berkman LLP will continue to follow the evolving case law and provide updates to clients and colleagues.

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